What is the Obamacare Penalty?

Many American consumers probably likely admit that there are some things to like in Obamacare, even if they’re not big fans of the law as a whole. For example, many will agree that it’s nice you can no longer be denied health insurance because of a pre-existing medical condition or something in your medical history. It’s also nice to know that subsidies are available for people who may not be able to afford coverage on their own.

But then there’s the Obamacare tax penalty. Some people may admit that the threat of a tax penalty may be necessary to get more people to enroll in health coverage. But no one likes the idea of paying the Obamacare penalty themselves.

In this article, we’ll look at what the Obamacare penalty is, how much it costs, why it was introduced in the first place, and what triggers the penalty for consumers.

What is the Obamacare penalty?

Signed into law in 2010, the Affordable Care Act (the law more commonly known as Obamacare) transformed the self-purchased individual and family health insurance market in the United States. Some of the law’s major provisions included:

• The so-called “individual mandate” requiring most American consumers to have an Obamacare-compliant health insurance plan
• The establishment of government subsidies (also known as “premium tax credits”) to help more people afford health insurance on their own
• The Obamacare tax penalty, which may be applied on your federal tax return if you go too long without Obamacare-compliant health insurance coverage during the year

Why is there is an Obamacare penalty?

The purpose of the tax penalty is to encourage more consumers to enroll in Obamacare-compliant health insurance plans, and thereby to help reduce the number of the uninsured consumers in America.

Obamacare utilizes a carrot-and-stick approach to move more people off the rolls of the uninsured and into Obamacare-compliant health insurance plans:

• The “carrot” is better health insurance coverage and government help provided by Obamacare, in the form of subsidies, to help qualifying consumers afford it
• The “stick” is the threat of a tax penalty; if the “carrot” doesn’t encourage you to get covered, the threat of the “stick” might

How much is the Obamacare penalty?

Unfortunately, the Obamacare tax penalty can be pretty substantial. It’s big enough, at any rate, to give anyone second thoughts about going without health insurance.

Like the subsidies that Obamacare provides to qualifying individuals and families, the Obamacare tax penalty works on a sliding scale. If you’re subject to the Obamacare tax penalty for 2016, you’re going to have to face the greater of either:

• 5% of your total household income for the year, or
• $695 per adult and $347.50 per child under 18 in your household

Whichever of those two items comes to more money for you, that’s going to be your Obamacare tax penalty for the year!

Now, there are some caps that may apply. For example, the per-person penalty is capped for 2016 at a maximum of $2,085. By comparison, the percentage penalty is capped at whatever the nationwide annual average premium is for a bronze plan sold through a government-run Obamacare marketplaces. This can come to significantly more than $2,085.

If your penalty is calculated on the percentage method, it’s also important to know that only the part of your income above the tax-filing threshold is utilized to determine the amount of your penalty.

If you have Obamacare-compliant health insurance during part of the year but not at other times of the year, your tax penalty will be pro-rated on a monthly basis. So, if you were only uninsured for three months, your tax penalty would be a portion of what your annual tax penalty would have been.

Likewise, if only one person in your household went without Obamacare-compliant coverage, you will not face a tax penalty as large as you would have if the whole family had gone without coverage.

What triggers the Obamacare penalty?

The Obamacare tax penalty may be triggered if:

• You are a citizen or legal resident of the United States
• AND you earned enough money to be required to file a federal tax return
• AND you or someone in your household went without Obamacare-compliant health insurance for more than two consecutive months during the calendar year

Other factors may also apply.

Generally speaking, you will NOT trigger the Obamacare tax penalty for going without health insurance if:

• You were not a legal resident or citizen of the United States
• You were not required to file a federal tax return because you didn’t earn enough money
• Or you were covered under another qualifying health insurance plan, such as an employer-sponsored group health insurance plan, Medicare, Medicaid, or something other government-run health insurance program

Other factors may also apply here too.

You’ll also be glad to know that if you’re uninsured for only 1-2 consecutive months during the year, you may be exempt from the Obamacare tax penalty.

How do you pay the Obamacare penalty?

The Obamacare tax penalty is paid when you file your federal taxes for the year in question. So, if you went without Obamacare-compliant health insurance coverage in 2016, you may have to pay the tax penalty when you file your 2016 tax return in early 2017.

On your federal tax forms, you’ll find that the Obamacare tax penalty is referred to as a “shared responsibility payment” under the Affordable Care Act. That’s the more official name of the Obamacare tax penalty.

As mentioned above, if you did not earn enough money to be required to file a federal tax return, you will not be required to pay the Obamacare tax penalty.

Do some people choose to pay the Obamacare penalty?

The number of people enrolling in Obamacare-compliant health insurance coverage has increased since the individual mandate came into effect in 2014 – and the cost of the Obamacare tax penalty has increased each year since then too.

However, there are some people who opt not to enroll in Obamacare-compliant coverage and to pay the Obamacare tax penalty instead.

For whatever reason, some people would rather go uninsured and face the penalty – or pay the penalty while enrolling in some form of coverage that does not meet the coverage requirements of Obamacare, such as short term health insurance plans, or critical illness insurance.

Of course it’s risky to go without Obamacare-compliant major medical health insurance. The cost of medical care without health coverage can be extremely burdensome. A single serious illness or hospitalization without Obamacare-compliant health insurance can push many consumers into bankruptcy.

If the “stick” of the penalty isn’t compelling to you, however, remember that the Obamacare law offers carrots too: many people who think they can’t afford Obamacare health insurance today aren’t aware of the generous government subsidies that may be available to them.